Business loans FAQs
Are business loans tax-deductible?
Can I repay my business loan early?
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What is a business loan?
A business loan is a form of finance that can be used to help support and expand your organisation.
As with personal loans, you borrow a sum of money, and pay it back, with interest.
One of the most important differences between personal loans and business loans is that with a personal loan, you will be personally liable for repaying the amount you have borrowed.
With a business loan, as long as the appropriate company structure is in place, that responsibility falls to the business instead. This will not be the case, however, if you are a sole trader, or you have secured your business loan with a personal guarantee.
You can also typically borrow more through a business loan, while the interest payments on your business loan may be tax deductible unlike payments on a personal loan.
Types of business loan
Secured business loans
Secured business loans require that you put down an asset such as property as security. Secured loans often come with lower interest rates than unsecured loans as they represent less risk for the lender. They may also give you access to a larger loan amount over a longer term. However, secured loans come with the added risk that you could lose your assets if you miss the payments.
Unsecured business loans
Unsecured business loans are a type of finance that does not require security. These types of loans tend to have higher interest rates because there is a greater risk of the lender losing money if you can't pay off what you owe. Unsecured business loans also require a good financial history and credit rating as evidence that the business will be able to repay the loan.
Government loans
There may be government-backed business loans you can access. Examples include the Recovery Loan Scheme, introduced to help with the financial stresses caused by the Covid-19 pandemic, which has now been extended. What schemes are available can vary depending on government policy and changing economic circumstances across the country. So it can be useful to regularly check the Department for Business, Energy & Industrial Strategy's search tool for guidance on the business loan schemes available in your region.
Start up business loans
The Start Up Loan Scheme is a government-backed fund that currently offers personal loans of up to £25,000 to UK businesses owners that have been fully trading for less than 36 months or those looking to start a business. You can apply for free, and there are no early repayment charges. If your application is successful, you'll also get up to 12 months of free mentoring. Government Start Up Loans have a fixed annual interest rate of 6% and must be repaid over a period of one to five years.
Small business loans
Small business loans are for start ups and small businesses to access funding. They can be used for a variety of purposes from hiring new staff to managing cash flow. As with all loans, small business loans are repaid over an agreed time period with interest. Large business loans tend to be cheaper than small business loans because there is less perceived risk with lending to a bigger company.
How to get a business loan
- Decide how much you want to borrow and for how longOnce you’ve decided a business loan is the right option for you, it is important to consider the balance between what you can afford and what you need to help your business.
- Compare business loan lenders to find the right fit for your organisationShopping around might help you get a business loan that best suits your needs. You can use our comparison table to search through the business loans available and find the right one for your company.
- Submit your application and all relevant documentsThis may include how long you have been trading, details about your finances, and what you want the money for.
- Compare business loan lenders to find the right fit for your organisationShopping around might help you get a business loan that best suits your needs. You can use our comparison table to search through the business loans available and find the right one for your company.
Pros & cons of business loans
- It can help companies access funds for daily operations and business growth.
- Some lenders offer flexible repayment lengths.
- You keep full equity in your business.
- Missed or late repayments can negatively affect your business credit rating.
- Business loan repayments may affect your cash flow and long-term business growth.
- You may lose an asset if you can't repay a secured business loan.
- You may have to pay a legal and valuation costs when applying for a secured loan.
Do I need a business bank account to get a business loan?
While it is not always a requirement, you may find that many lenders will not consider you for a business loan if you do not also have a business bank account. It can also make the application process simpler if you do.
In general, business bank accounts can make it easier to manage your finances, and ensure that there is a clear separation between your personal and business funds. This is especially important when it comes to managing a business loan.
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